Customers are fickle and unpredictable creatures. Their behaviour and purchasing decisions can be completely illogical. Designing customer interactions that delight and build brand loyalty may seem almost impossible. Behavioural economics, however, may offer a solution for companies struggling to understand their customers better.
Behavioral economics studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions.
Tricia Mikolai, managing director for BI Worldwide, defines behavioural economics as, “The study of how people make decisions. Most people believe the decisions they make, particular purchasing decisions, are logical decisions made in their best interest. In fact most of their decisions are based on feelings and emotions.”
According to researchers such as Gallup, economic decision making is up to 70% emotional and 30% rational. Behaviour economics aims to understand the emotional and irrational factors involved in decision making and how to use that understanding to change consumer perceptions and behavior.
Mia Lander, behavioural economist and founder of KnowledgeSpace, elaborates, “Behavioural economics explains in psychological terms why people make the decisions they do. So why do people by a Mercedes when a Hyundai can do exactly the same thing? So it’s looking at the social, emotional and cognitive processes involved in the customer’s decision making process. “
Influencing customer behaviour
An enterprise is likely to have millions of interactions with customers each year. Each one of those interactions represents an experience a customer has with a brand. Each interaction is influenced by perceptions and behavior.
Companies are spending greater and greater effort in understanding and designing customer interactions to improve brand loyalty and build new business. The aim is to make each interaction more pleasurable and painless for the customer. Mikolai comments, “Behavioural economics tries to identify those factors and the drivers that motivate customers decisions and purchasing behaviours. The aim then is to encourage people to behave differently.”
The determinants, inputs or drivers that affect a customer’s decision making process are many and varied. Mia Lander comments, “Is it something you as a company are doing or is there something happening in a wider social space or is there something in the media that’s influencing the customer’s thought processes. What’s trending in the media can have a significant impact, potentially elevating fear or concern about an industry or organisation.”
Putting it into practice
Though a number of enterprises appreciate the need to understand the factors influencing a customer‘s decision making process, few are able to act and drive the necessary changes.
Many organisations are just completely oblivious to what makes people tick. John DeVine and Keith Gilson, from Mckinsey & Company, comment, “Banks, for example, often disturb the customer experience by altering the menus on ATMs or the interactive-voice-response (IVR) systems in call centers. They fail to recognize the psychological discomfort customers experience when faced with unexpected changes”.
Corporate inertia, as Mia Lander points out, can be a major hurdle to implementing the basic principles underlying behavioural economics. Enterprises can operate in silos, where executives and managers are more concerned with their own positions and controlling their own fiefdoms within the organisation’s structure, rather than thinking and acting in a way that benefits the entire enterprise.
Significant cultural change is required to overcome these silos. It’s one thing to understand one’s customers and what’s influencing their purchasing decisions. It’s another thing to implement the necessary changes. The changes required do not concern processes, technology, operations, etc, as much as the mindset of the organisation and its leaders.
Be wary of big changes
Though digital disruption and customer experience may require radical change in the way an organisation views and thinks about its customers. Introducing unexpected changes to your customers can greatly degrade their experience.
In her article, 3 Customer Experience Lessons From Behavioral Economics, Cathy Reisenwitz demonstrates how insights gleaned from behavioural economics can help companies manage the introduction of disruptive changes while encouraging customers to change their behaviour. She advises:
- Break down the barriers: Given the choice between doing what is easy now or what is better later, people can be counted on to choose the former.
- Give it away: gifts are generally more effective incentives than quid-pro-quo offers.
- Gamify the drudgery: find ways to gamify the drudgery of being a good customer and give them an instant reward, however small, for doing what you want them to do.
People do not always behave rationally. In fact most of the time they don’t. Most of their behaviour is driven by fear, the desire for excitement, their need to feel important and a host of other feelings and emotions. By understanding these drivers you can start shaping experiences that appeal to their emotions, feelings and thought processes. It’s about understanding your customers as humans.
